Pros and contingents

Contingent commissions are, it seems, always to be surrounded by controversy.

The debate over whether brokers should accept such an incentive payment to ensure insurers’ sales volumes or profi tability targets – on top of the usual insurer commission payments or servicing fees from clients – heated up in July. Two of the world’s three leading brokers made their opposing positions very clear.

First in the ring was Willis, which on 19 July unveiled a third-party authored white paper deploring contingent compensation. This followed its ‘Clients before contingents’ campaign, launched at the US RIMS conference in April. Hot on the heels of Willis’s move came an announcement from Aon on 21 July that it was “working with markets to explore the various forms of alternative remuneration available to Aon”.

Aon Risk Solutions’ chairman and chief executive officer, Steve McGill, said: “We have decided to accept various forms of compensation, which may include supplemental or contingent commissions in the geographies and client segments globally, where appropriate and legally permissible.” Aon’s stance is that additional remuneration is acceptable if clients know about it.

Gloves are off

Willis wasted no time in responding to this, saying Aon was “retreating to a troublesome, ambiguous position on contingent commissions”. It also branded Aon’s announcement “a wake-up call to all risk managers and buyers of insurance to re-evaluate whether their broker really works for them or the insurance carrier”.

In a statement, Willis added: “Another competitor has opted to put contingents before principle.” It also claimed that Willis was now the world’s only insurance broker to refuse to accept such payments in its retail business.

Its statement asked: “Who is convinced that taking back-door payments from carriers at the end of a year, based on profi tability and growth of a book of business, is an example of, as Aon’s Steve McGill says in the company’s news release, ‘doing what is right to serve the best interests of our clients’?”

Twists and turns

Contingent commissions were accepted for years as part of the way the industry did business. But they were challenged in 2004 by the then New York attorney-general, Eliot Spitzer, on the basis that they created a confl ict of interest. His focus was on the largest insurance brokers, which subsequently stopped accepting contingent commissions.

However, continued pressure from brokers resulted in a volte-face, with the New York attorneygeneral’s offi ce and the New York Insurance Department agreeing to lift the prohibition on contingent compensation in February this year. So are risk managers prepared simply to spectate while the big brokers fi ght it out? Clients, too, have a say – after all, it’s their money at stake. But whether they are prepared to voice it is another matter.

Risk managers who don’t believe incentive payments from insurers create a confl ict of interest often cite the fact that they have transparency from their broker as to any contingents payable on their business. However, a report commissioned by Willis from international law firm Edwards Angell Palmer & Dodge suggests brokers should clarify how much money is involved, not just in respect of their own business but collectively from one insurer. This could be an eye-opener.

Some big brokers may argue that they haven’t been operating on a level playing fi eld because the contingency commission ban did not affect their smaller competitors. But their balance sheets over the past two years suggest that the large brokers are doing pretty well, given the recessionary pressures.

Do they really want to be seen putting their investors’ interests above those of their clients?

Why are many risk managers reticent in deploring contingent commissions? A cynical view might be that many of them started working life as an insurer or a broker and that there’s still certain old boys’ club operating. And, as companies come under pressure and make cuts to their risk management staffi ng, some redundant risk managers have taken roles in insurance and broking fi rms.

The whole issue of broker remuneration in its current form perhaps raises a separate debate.

Brokers supposedly act as the representative of the insured but their costs are generally paid by insurers. In most countries, if you are paid a commission by someone, you’re regarded as being their agent.

Conflict of interests

There’s a confl ict of interest in the present circumstances before you even get on to the thorny subject of contingent commissions – but it’s a situation that suits most insurance buyers very well because it minimises their company’s costs.

The unpalatable truth is that the party who pays your fees and contributes to your business’s profits is the one that is most likely to take priority.

Few companies want to pay a service fee to their broker instead of allowing their broker to be remunerated by insurers’ commissions. But that has to be the way ahead. Otherwise brokers can – and perhaps do – end up simply as insurers’ agents.

Arguably, the whole structure of reimbursement in the industry has to change or there will always be confl icts of interest.

Finally, perhaps the biggest argument for risk managers against contingent compensation is that the client will end up paying. Any money that insurers pay out will result in higher premiums for businesses.

These days, we are very conscious of the term ‘value added’. Contingent commissions don’t add any value for the client – but they’re likely to add to the cost of buying cover. ¦

Sue Copeman is editor-in-chief of StrategicRISK